LOGISTICS AS A DRIVER FOR COMPETITIVENESS IN LAC - 2011.pdf

7/23/2019 LOGISTICS AS A DRIVER FOR COMPETITIVENESS IN LAC - 2011.pdf

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AmericasCompetitivenessForum V

Santo Domingo, Dominican Rep.October 5-7, 2011

Logistics

as

a

Driver

for

CompetitivenessinLatinAmerica

andtheCaribbean

Author:

Jose

Luis

Guasch


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Logistics as a Driver for Competitiveness in

Latin America and the Caribbean

JoseLuisGuasch

PresentedattheFifthAmericasCompetivenessForumforthe

InterAmericanDevelopmentBankandCompeteCaribbean

SantoDomingo,DominicanRepublic,October57,2011

InterAmericanDevelopmentBank,2011

www.iadb.org

The informationandopinionspresentedinthesepublicationsareentirelythoseoftheauthor(s),andnoendorsementbythe

InterAmericanDevelopmentBank,itsBoardofExecutiveDirectors,orthecountriestheyrepresentisexpressedorimplied.

Addressforcorrespondence:1300NewYorkAvenue,N.W.,WashingtonD.C.,20577.


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LogisticsasaDriverforCompetitivenessinLACJoseLuisGuaschPage2

Abstract

Logistics isbecomingacriticalelementofcompetitivenessandeconomicperformanceboth in

itselfand

within

the

context

of

increasing

globalization.

Most

Latin

American

and

Caribbean

(LAC)countriesare focusingonexportledgrowthstrategies.Forsuchstrategiestosucceed,a

keycomponentisaneffectiveandefficientlogisticsframeworkthataddressesthefullspectrum

upstream, midstream, and downstream of the value and production chain. A logistics

framework includes hardware, which is the physical infrastructure needed to move goods

effectively,andsoftware,which is theassociatedservicesandprocessesneededtomoveand

trade goods effectively. The impact of logistics costs on competitiveness, productivity, trade,

integration,foodprices, inequality,andpoverty issignificant.InLAC,logisticscostsrangefrom

18 to35percentofproductvalueandevenhigher forsmallandmediumsizedenterprises

(SMEs)atabout40percentcomparedtobenchmarksofaround8percentofproductvaluein

Organisation for Economic Cooperation and Development (OECD) countries. While in recent

yearsmost

LAC

countries

have

realized

the

relevance

of

logistics

and

have

taken

some

measures

toimprovethiselementoftheirmarkets,theregionstilllagsbehindindevelopinganeffective

logistics framework. This report illustrates the relevance and impact of logistics for

competitiveness in LAC and provides a framework, priorities, interventions, and solutions to

addresstheissues.

ThispaperbenefittedfromtheeditorialinputofSheilaMahoney.


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Table

of

Contents

Abstract......................................................................................................................................................... 2

LogisticsasaKeyComponentofanEffectiveCompetitivenessFramework................................................ 4

DefinitionandStructureofLogisticsCosts................................................................................................... 6

MeasuringLogisticsCosts............................................................................................................................. 7

TheStatusandImpactofLogisticsCostsin LatinAmericaandtheCaribbean........................................... 8

CustomsClearanceandBorderCrossings.............................................................................................. 11

InlandTransport:Roads.......................................................................................................................... 12

InlandTransport:Trucks......................................................................................................................... 12

Warehousing,Storage,

and

Inventory

Costs

..........................................................................................

13

MaritimeTransport................................................................................................................................. 14

TimeandFinancialCosts......................................................................................................................... 14

ColdCapacity........................................................................................................................................... 14

ImpactonFoodPrices(AndthusonthePoor)....................................................................................... 15

BenefitsofDecreasesinLogisticsCosts...................................................................................................... 18

IncreasedDemand,Production,andEmployment................................................................................. 18

IncreasedTradeFlows............................................................................................................................ 18

IncreasedEarningsforthePoor.............................................................................................................. 19

IncreasedNumberofNewProductsandVolumein ProductandExportBasket.................................. 20

ReducedFoodPrices,withaPositiveImpactonPovertyandNutrition................................................ 20

OtherBenefits......................................................................................................................................... 20

PolicyRecommendationstoReduceLogisticsCosts.................................................................................. 22

MovingForward:TowardanEffectiveLogisticsPlatform...................................................................... 24

Bibliography................................................................................................................................................ 27

References..................................................................................................................................................

28


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Logistics

as

a

Key

Component

of

an

Effective

Competitiveness

Framework

Logisticsisbecomingacriticalelementofcompetitivenessandeconomicperformancebothinitselfand

withinthecontextof increasingglobalization.MostLACcountries,giventheirrelativelysmallsizeand

limitedpurchasingcapacity,arefocusingonexportledgrowthstrategies.Forsuchstrategiestosucceed,

anumberofkeycomponentsneedtobeinplace(Guasch,2004).

Macroeconomicstabilityisnecessarytoenticesignificant(private)investment.

Accesstomarkets iscriticaltodevelopastrongexport initiativegiventhesmallsizeofthemarkets in

LACcountriesandthelimitedpurchasingpoweroftheregionscitizens.Therearetwosubcomponents

ofaccess tomarkets.First,a relativelyopentradepolicyneeds tobereflected in reasonableexternal

tariffs.Second,

favourable

trade

terms

need

to

be

secured

with

anumber

of

key

trade

partners,

usually

throughbilateralormultilateralfreetradetreaties.Itisalsoimportanttosecurepreferentialtreatment

incriticalmarketsgiventhefailureoftheDohaDevelopmentRound.

Thesupplyofexportablegoodsneedstomeetthepriceandqualitydemandedbyforeignmarketsfor

LACcountriestobecompetitive,thusimprovingproductivitylevelsisessential.Thebasicingredientsfor

improving productivity are quality of human capital and education, the availability of adequate

innovation and knowledge transfer, and adequate access toexport financing.Whilehaving access to

marketsonfavorableterms iscritical,itisevenmore importanttohavegoods(orservices)thatare in

demandbothwithin the country and from tradepartners,and that are competitivelyproduced.The

productivityeffect,

which

is

anchored

in

productivity

gains,

entails

awhole

set

of

factors,

such

as

Aquality,standardsystemtosupportlocalproduction

Aframeworkforknowledgetransferandinnovation

Amethodtoscaleupproduction

Diversificationofproductionandexports

Aprocesstoreshapeacountrysproductivestructure

Anadequatesystemtoproducehumancapital

Effective logistics, including infrastructure and associated services, are required to prevent logistics

costsfrombecominganobstacletoproductivityandcompetitiveness.Thetwomajorsourcesoflogistics

costsfor

LAC

countries

are

infrastructure

(hardware)

and

associated

services

(software),

particularly

those related to trade logistics, transport,andenergy.Effective logistics facilitate theproductionand

distribution of products (or services) at a low cost and in a reliable manner. It is essential that the

competitiveadvantageacountrymighthaveinproducingademandedgoodandtheaccesstomarkets

itmayhave forthatproductarenoterodedbythecostsofmovinggoodsfromfactorytodestination

using an unreliable and costly logistics system. As mentioned, there are two subcomponents of a

logisticssystem.Thehardware roads,ports,airports,and railroads is thephysical infrastructure


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needed to move goods effectively. The software is the associated services and processes needed to

moveandtradegoodseffectively,suchas

Customsprocesses

and

procedures

Licencesandfees

Regulations,inspections,andcertificates

Packaging

Accesstoessentialfacilities

Dryportsandlogisticsterminals

Technologicalsupport

Multimodaloperators

Availabilityofcoldchain,hubs,andsiloservices

Consolidatedbrokers

Small andmediumsizedenterprises(SMEs,whicharethemajorityoffirms inLACcountries)needto

bemovedintotheproductionvalueandexportchaintosecureinclusivegrowthandjobcreation.Social

andproductioninclusionneedtobeaddressedgiventhestructureinLACcountries.Itisalsoimperative

for efficiency, equity, and political and social considerations that any production and export/trade

initiativebewidelyownedand that thebenefitsbewidelyshared.Thus it iscritical thatany logistics

system contain components that facilitate the mainstreaming of micro, small, and mediumsized

enterprises (MSMEs) into the production, export, and value chain. The employment, inequality, and

growth impactofmainstreamingactionscanbeextraordinary,and insomecontextsarecriticaltothe

sustainabilityandsuccessofthestrategy.

Financial instruments are required to support access to credit and exports. To support vibrant

productionactivityandmainstreamSMEs,somereasonablelevelofaccesstocreditandamovetoward

universalbanking isessential.Also,forexportstobesuccessfulthere isaneedtohaveaminimumof

specialized financing instruments,suchaspre andpostexport financing,export insurance,andsome

acceptablesuccessinaccesstocreditsupport.

An adequate set of institutions and programs (governance) is required to provide leadership and

coherentsupportandthusensurethatthefactorsmentionedaboveareinplace.

Ultimately, for an exportled economic growth strategy to succeed, a country needs to promote an

overallinvestment

climate

that

is

conducive

to

doing

business

and

reducing

transaction

costs

and

unnecessaryregulations.

Logistics isacriticalpillar inastructure intended tosustaingrowthand increasecompetitivenessand

alsocontributessignificantlytothemainstreamingofSMEs intothevaluechain.Thusaneffectiveand

efficientlogisticsframeworkthataddressesthefullspectrumupstream,midstream,anddownstream

ofthevalueandproductionchainisakeypartofanyexportledgrowthstrategy.


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Definition

and

Structure

of

Logistics

Costs

For LAC firms to be competitive, particularly exporting companies, it is crucial that they carefully

consideravariety

of

logistics

related

factors

when

developing

their

businesses.

First,

firms

must

identify

theirclientsandbreakdownthecoststhatwillbeincurredalongtheproductsdistributioncycle.There

arecostsassociatedwithprocessingdocumentation (permits,certificatesofqualityandorigin,billsof

lading,and/ormeetingphytosanitarymeasures),managinginventories,packagingandconsolidatingthe

product,customsprocedures,insurance,financing,andoceanandroadtransport,amongothers.These

costs are highly dependenton the type of product to be exported. Highvalue perishable goods, for

example,havetobetransported inrefrigeratedcontainersandcallforexpediteddeliveryusingtrucks

or,ifavailable,usingmultimodaloperatorsthatstreamlinetransportoperations.

Inthisreport,logisticscostsreferstothecostsinvolvedintheprocessofmovinggoodsfromthefactory

tothe

point

where

the

product

leaves

the

country

(port,

airport,

border

crossing).

These

costs

include

Transportcosts

Licenses,permits,andcustomsprocessing

Inventory,warehousing,spoilage,orlossesintransit

Insurance

Port,airport,orcrossborderprocesses

Financingcosts

Administrativecosts

Figure1 shows an example of the structure and average weights of logistics. Clearly, the structure

presented

is

product

specific

and

there

are

variations

depending

on

the

type

of

product

(Guasch,

2008).

Figure1.AverageStructureofLogisticsCost

Source:Guasch(2008)

Policymakers must in turn understand the needs of firms within this context and support reform

programsthatfosterdevelopment.

Warehousing

19.0%

Inventories

(andFinancialCosts)

18.7%

Transport:Roads

or/and

Railways

14.0%

Transport:PortRelated

17.8

Licensesand

Procedures

10.1%

AdministrativeCostsandLosses

20.5%

CostofTransport=31.8%


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Measuring

Logistics

Costs

Logistics performance is difficult tomeasure (and to interpret). There are three main approaches to

evaluatinglogistics

performance

and

costs

(see

Table

1):

1. Themacroapproachmeasureslogisticscostsasa%ofGDPusingcalculationsbasedonnational

accountnumbers.

2. Themicro approach measures logistics costs as a % of product value, which is obtained by

surveyingfirms.

3. The Logistics Perception Index measures subjective notions of logistics performance by

surveyingfreightforwarders.

Thethreeapproachestendtobehighlycorrelated,thoughtheydifferintermsofdifficultyofmeasuring

and

the

value

of

the

information.

The

most

appropriate

and

accurate

is

the

micro

approach,

which

estimatescostsasapercentageofproductvalue.Thoughitisthemostusefulbecauseitmeasuresreal

costs,itisalsothemostlaborintensiveandcostlybecauseitisdonebysurveyingproducersandservice

providers.TheLogisticsPerception Index isasubjectiveevaluation(thoughmoreandmore ittendsto

be complemented by hard data) and is relatively easy and straightforward to evaluate. The macro

approach is the easiest to estimate (youjust need national account numbers), yet its accuracy and

usefulnessisquestionable.Thisreportusesthemicroconceptwhenreferringtologisticscosts.

Table1.LogisticsPerformanceEvaluation

Macroapproach Microapproach LogisticsPerceptionIndex

Basedon

national

accounts

Logisticscostsasa%ofGDP

Requiressomeassumptions

Quickandeasy:

Providesoverallresults

Example:

GuaschandKogan(2002)

Alternativeapproaches

(MichiganStateUniv.)

Basedon

firm

surveys

Logisticscostsasa%ofsalesvalue

Otherlogisticsperformance

indicators

Needslargesamplesforrobustness

Examples:Peru(Guasch,1997),

Argentina(1999),

LALCObservatory

Corridorapproach

(USAidsFastPath)

Newexercise:

World

Bank,

GFP,

andTurku

Perception:subjective,from

pooledinformationprovidedby

freightforwarders

Allowsforauniqueindicator,

whichcanbecorrelatedto

others

(WEF,WB,etc.)

Otherharddataalsocollected

Source:Guasch

(2004)


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The

Status

and

Impact

of

Logistics

Costs

in

Latin

America

and

the

Caribbean

In LAC countries, logistics costs range from 18 to 35percent of product value compared with a

benchmarkofaround8percentinOECDcountries(seeFigure2).Onamacrolevel,logisticscostsinLAC

are between 16 and 26percent as apercent of GDP compared to the OECD benchmark of about

9percent.ForSMEs, logisticscostsaresignificantlyhigherataround40percentofproductvalue (see

Figure3). Two other critical indicators are losses/spoilage rates and inventory levels, which are also

shown in theFigure2.Losses/spoilage rates inLACareabout25percentofoutputandvery close to

50percentforperishables.Inventories inLACaretwotothreetimesthose intheUnitedStates,which

has a tremendous impact on costs and competitiveness. As a result, the impactof logistics costson

competitiveness,productivity,trade,integration,foodprices,inequality,andpovertyisveryhigh.While

inrecent

years

most

LAC

countries

have

realized

the

relevance

of

logistics

and

have

taken

some

measurestoimprovethiselementoftheirmarkets,theregionstilllagsbehindindevelopinganeffective

logistics framework.Logisticscosts,particularly transportcosts,areamajorbarrier to trade inLACat

two to three times thepercentofproductvaluehigher than tariffsandduties (seeFigure4).Average

importtariffshavecomedowninLACsincetheearly1990sandremainatabout11percentofproduct

value,rangingfrom6to14percent,dependingonthecountry,andmuchlowerthanlogisticscosts.

Figure2.DeterioratingandInsufficientInfrastructure

ContributestoUncompetitiveIndustries,2004

Source:Guasch(2008)

ThereisgreatvariationamongLACcountrieswithrespecttotheshareoflogisticscostsasapercentageof

productvalue(Figure3).Peru,forexample, isonthehigherendofthescale,withaveragelogisticscosts

representing32percentofproductvalue.Chileisonthelowerend,withcostsrepresenting18percentof

productvalue.Developed countries like theUnited StatesandSingaporearewellbelow LACaverages,

withlogisticscostsrepresentingroughly10percentand9percentofproductvalue,respectively.


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Figure3.LogisticsCostsaspercentageofProductValue,2004

Source:GuaschandKogan(2006)

Forsmallfirms,domesticlogisticscosts,including inventorymanagement,warehousing,transport,and

distribution, can total over 42percent of total sales (Figure4). By comparison, larger firms spend

between15and18percentofsalesonlogistics.

Figure4.LatinAmerica:AverageLogisticsCostsbyFirmSize(TotalVolumeofSales)

Source:

Centro

Logstico

de

Latinoamerica

Figure5showsthatexternaltariffs,asillustratedbythevariousbars,arevirtuallyallbelow20percent

ofproductvalue.Ashasbeenshowninpreviouscharts,logisticscostsareabovethatnumber.Thus,in

asmuchasLatinAmericancountriesareplacingmucheffortintosecuringfreetradeagreements(FTA)

mostly bilateral they ought to put comparable effort into reducing logistics costs, since the

benefitswouldbeevenlargerthanthosesecuredthroughFTAs.

29.4

11.36 10.636.9

12.7

6.28 7.3111

0

5

10

15

20

25

30

35

40

45

Less than US$ 5 M US$ 5 M to US$ 50 M US$ 50 M to US$ 500 M More than US$ 500 M

Inventory Management &Warehousing Transpo rt &Distribution

4 2

18 18 18


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Figure5.LACsLogisticsCostsAreHigherthanTariffBarriers

LAC

import

tariffs

on

food,

2008

0 5 10 15 20 25 30

Caribbean

Central America

South America

Ad Valorem Rates

Meat

Vegetables

Dairy

Fruits

Cereals

Logistics

Costs

Shareof

Product

Value

Note:Advaloremratesaretariffsthatarebasedonproductvalue.

Source:WorldBank,LCCSDEconomicsUnit(2010).CalculationsusingTRAINSdatabase,UNCTAD2008.

Concerns about the regions high logistics costs have tended to revolve around overall export

competitivenessandproductivity,andderivedeffects.1Theseeffectsaremultipleand significant.For

example,thereisadirectimpactoflogisticsonthecostofdeliveredgoodsparticularlyfoodproducts

andthusonthepoor,asshowninFigure6.

Logisticscostsrepresentagreaterbarriertotradethanimporttariffsandmakeupalargerpartofthe

deliveredcost

of

food

products.

In

fact,

while

food

import

tariffs

are

heterogeneous

across

countries

andfoodgroups,onaverage,advaloremrates(taxesbasedonvalue)decreasedintheregionfrom2005

to2008andcurrentlyrangefrom3to12percentofproductvalue.Ontheotherhand,withrespectto

transport costs, the international maritime and road haulage components alone can total about

20percentofthefreeonboard(FOB)valueofgoodsifcombined.Bythetimeproductsaretransferred,

handled, stored,anddistributeddomestically, the logistics componentof thedeliveredgood isoften

morethan50percentofthefinalpricetoconsumers.

Forexample, theCaribbean,anet food importing subregion thathasparticularlyhigh logisticscosts,

alsohasthehighestimporttariffs,punishingitsconsumerstwice.In2008,importtariffsacrossallfood

groupsaveraged

about

16

percent

for

Caribbean

countries,

compared

to

11

percent

for

Central

Americancountriesand5percent inSouthAmerica.Onaweightedaveragebasis, importtariffsonall

foodgroupsdecreasedwiththeexceptionofdairy,which increasedfrom2006to2008.Suchchanges

1 The InterAmerican Development Bank (IDB), for example, recently estimated that a 10percent regional

reduction intransportcostswouldhavenearly20timesmore impactontheregionsexport levelstotheUnited

Statesthana10percentreductionintariffs(Moreira,Volpe,andBlyde,2008).


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havebeendrivenby theCaribbean countries (primarilyBarbados,Dominica,andSt.Vincentand the

Grenadines) and by Mexico. This situation is particularly worrisome given that, in addition tohigher

importtariffs,

the

shipping

structures

in

the

Caribbean

islands

provide

very

little

direct

service

and

low

connectivity, which research has shown leads to higher ocean freight rates. Regression analysis has

shownthat ifacountrycandouble itscentralitywithintheglobalshippingnetwork,transportcosts

willdeclinebyover15percent.

Figure6.LocalProducersArePunishedbyLogisticsCosts

0

0.2

0.4

0.6

0.8

1

1.2

Farm

Gate

ProducerProfit

Intermediary

Margin

TransportFarm

GatetoDistributionCenter

HandlingatDistribution

Center

ansportfrom

Distribution

CentertoBorder

CustomsAgencyServicesCostaRica

CustomsTime

CostaRica

Duty

CustomsAgencyServicesNicaragua

CustomsTimeNicaragua

TransportFrom

BordertoCenterof

Distribution

HandlingatDistribution

Center

ransportform

Distribution

CentertoOpen

AirMarket

HandlingLosses

Storage

Customs, 11%

Duties, 6%

Transport, 23%

Others 9%

Farm gate, 31%

US$/kg

Disaggregated costs incurred bya

small Central American

fruitexporter

Source:LCSSDEconomicsUnit,WorldBank(2010)

OtherspecificlogisticsfactorsandtheirstatusinLACaredescribedbelow.

Customs

Clearance

and

Border

Crossings

Evidencesuggests thatdelays incustomsclearance inLAC increase transportcostsbybetween4and

12percent.Thatis,ifthetimeforcustomsclearancecouldbehalved,transportcostscouldbereduced

by that samepercentage (Guasch and Schwartz, 2008). This finding is consistent with LAC firm

perception surveys from Investment Climate Surveys (ICS), Doing Business Surveys, and the Logistics

PerformanceIndex(LPI).IntermsofcustomsefficiencyandorganizationtheLPIsfirstdimension

inthe

2007

survey,

the

LAC

region

received

ascore

of

only

2.5

out

of

5.

Furthermore,theanalysisofbordercrossingandcustomstofreightratessuggeststhattheexistenceof

directlandaccessofanytypereducestransportcostsbyaround6percent.Moreover,adoublingofthe

numberofbordercrossingscould reduce transportcostsbyanother6percent.Theburdenofborder

crossingscanaffectfoodpricesgiventhe importanceof intraregionaltrade inprimarystaplessuchas

grains and beef. Also the studies show that over costs from inefficiencies in the logistics chain,


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particularlyatbordercrossings,representaround20percentofthetotalcostsincurredintheimportof

ParaguayansoybeansintoBrazilandbeefintoChile(Schwartz,Guasch,andWilmsmeier,2009).

Inland

Transport:

Roads

Onavaluebasis,38percentofall food imports intoSouthAmericaarehandledusingroadtransport.

Further,nearlyalldomesticmovementsandasignificantshareofinputstofoodexportsaremovedby

road particularly in Central America and Mexico. Given this fact, the lack of road maintenance is

emergingasthegreatestthreattoaffordableandreliabledeliveryofbasicgoods inLAC,evenforthe

regionsmoreadvancedeconomies,suchasBrazilandCostaRica.Highpostharvest losses inLACcan

largelybeattributedtothepoorstateoftheroadsintheregion,especiallysecondaryandaccessroads,

andthe lackofcoolingcapacityandservices.More importantly, thepoorqualityoftheroadnetwork

makesaccesstoevenlocalmarketsdifficult,letaloneregionalornationalmarkets.

Roadquality,or lack thereof,affects the timelinessof shipmentsand, consequently,a firms costsand

competitiveness.AccordingtotheLogisticsSurveyofthreekeyexportsectorsinCostaRica,roadqualityis

identifiedasoneofthethreemainimpedimentstobusinessin80percentofresponses.Accordingtothe

surveyforCostaRicasICS,roadqualityisamajororverysevereconstraintonthebusinessenvironment

for40percentof the firmssurveyed.ThepoorandworseningqualityofCostaRicas roadnetworkalso

causes direct losses from delays in shipments, breakage, and theft (which combined account for 8 to

12percentofthesalesvalueofexportedgoods).Thedecliningroadqualitycanbepartlyexplainedbythe

declineinpublicinvestmentontransportinfrastructure(decreasingfrom1.5to2.1percentofGDPinthe

mid1980s to less than0.5percent in2003)even though transport accounted for mostofCostaRicas

public investment during that period, at 71percent of investment on roads, 13percent on ports, and

8percentonairports.WhileCostaRicatodayhas30percentmorepavedroadsperworkerthanthenext

mostdenselypavedcountryinLatinAmerica,only32percentofthoseroadsareofgoodquality[unclear

from thepaperwhether32percentofpaved roadsorof theentire roadnetwork],and thepaved road

densityoverall has been declining along with investment in the sector from a peak in1998. The road

infrastructurequalityoverall is theworst in thecentral region,whichproducesabout80percentof the

countrysexports.Amoreextensiveuseofrailroadswouldbepartofthesolution.2

Inland

Transport:

Trucks

Theefficiencyofacountrys trucking sectorplaysa role in itsoverall importcost structure.Trucking

regulation,

in

particular,

presents

a

paradoxical

problem

for

many

governments:

costly

if

they

do,

costly

if they dont. Shippers argue that tougher rules and enforcement related to weight restrictions,

overloading,andtruckqualityandsafetywillimmediatelyincreasetransportcosts,whichwillbepassed

2Thepossibilityofaddressing thisproblem through thealternativeuseof railroads is limited. InArgentina, for

example,therailroadsrelativeshareintransportingcerealsandoilseedtoRosariofellfrom20percentin1998to

15percentin2004.Ithasbeenestimatedthat,inthecaseofthisparticulartrafficalone,railparticipationcouldbe

increasedto30percent,withaconsequentsavinginfreightcostsperton.


14/29


ontoconsumers.Whileitistruethattransportregulationsleadtocoststhatcanbeestimated,itisalso

truethatthelackofregulationand/orenforcementoftruckingregulationscreatescosts,althoughthese

areindirect

and

take

time

to

manifest

themselves.

Typically,

smaller

producers

and

local

agriculture

tradersarethemostheavilyaffectedbydilapidatedroadsandfailuresintruckingregulation,whilelarge

shippersusingthemainhighwaysandtradecorridorsbetweenlargecitiesandportsarelessaffected.

Warehousing,

Storage,

and

Inventory

Costs

High inventorycostsarean important logisticsbottleneckfortheregion, inturndrivingupthecostof

delivered products. For LAC businesses, inventory costs equal 35percent of GDP, compared to only

15percent for businesses in the United States (Guasch and Kogan, 2006). When compared to

inventories in the United States, raw material inventory levels held by LAC businesses across all

industries are approximately 2 to 5 times as high, significantly increasing unit costs and diminishing

competitiveness(Guasch

and

Kogan,

2001).

Within

the

sample

considered

for

this

analysis,

Ecuador

is

thecountrywiththehighest inventory levels,followedbyBoliviaandPeru.Mexico isthecountrywith

thelowestinventorylevels.Beyondpoorroadinfrastructure,highinventorylevelscanalsobeexplained

by substandard storage networks in many of the regions countries, a lack of competition for

warehouses,highratesforstoragespacerentalinLACcomparedtootherregions,andalackofeffective

instruments for financing inventories.Moreover, increasingly there isa lackof sufficientwarehousing

capacityintheagriculturalsector,whichhasbeenproventobeparticularlycostlyforsmallshippers.In

theUnitedStates,therentalcostforasquaremeterofstorageisUS$100peryear;inColombia,rental

costsinBogotaontheFreeZoneinthePacificisgreaterthanUS$350peryear.Theneedforadditional

storage capacity is also a consequence of the shortage of efficient intermodal transfer terminals.

Accordingto

estimates,

Brazils

warehousing

shortage

alone

is

currently

about

40

million

tons

per

year.

If Brazilwere todouble its number of intermodal transfer terminals from the current 250, the total

inventoryandwarehousingcostscouldbereducedbyasmuchasUS$1billionperyear.

Onaverage,total inventorycarryingcosts inLACrepresent19percentoffinalproductvalue,although

theyrangefrom9to50percentofproductvalue.Thesecostscanbedividedinto

Capitalcosts

Taxes

Insurance

Obsolescence

Storage

Amongthese,capitalcostsarethehighest,averaging15percentofproductvalue,followedbystorage

costs(2percent),andobsolescencecosts(1percent).


15/29


Maritime

Transport

Thebeliefthatmaritimeshippingcostsareunrelatedto logisticsconditions inaparticularcountryhas

beenproven

false.

The

linkage

is

the

connectivity

of

the

ports

and

the

time

in

port.

When

acountry

is

betterconnectedandtheturnoverfaster,theshippingratesdecline.ThisisillustratedinFigure7,which

provides the resultsofa regressionanalysisofoceanservicedata forCaribbeancountries.Thegraph

showsastatisticallysignificantcorrelationbetweenconnectivityandoceanfreightrates,whichconfirms

the importance of regular and reliable ocean services using the Transshipment Connectivity Index, a

measureofthecentralityofacountrywithintheglobalshippingnetwork.Inthiscase, ifacountrycan

doubleitscentralityinthenetwork,whichwouldrequiresignificantlyincreasingitsdirectlinerservices

toawiderrangeofcountries,transportcostscoulddeclinebyover15percent.Whilehardertocontrol

in the shortterm through direct policy interventions or investments, a countrys connectivity is an

important longterm resultofport reform,cargoagglomeration,and the resultingattractivenessofa

countryas

amajor

port

of

call

or

transshipment

center.

Figure7.RelationshipbetweenFreightRatesandConnectivity,

ContainerShippingCaribbeanBasin,2006

Source:Wilmsmeier(2008)

Time

and

Financial

Costs

Anothercritical

determinant

is

the

financial

costs

associated

with

lengthy

transport

trips

and

delays

at

differentpointsinthedistributionchain.

Cold

Capacity

Acountryscapacitytoprovidecoolingservicesforperishablesisacriticalelementofitslogisticssystem.

Deficientservices leadtohighratesofspoilageandstuntthedevelopmentofthesector.Figure8shows

thattheLACregiondoesnotfarewellincoolingcapacity(evenwhennormalizedbasedonGDP).

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Freightrate

index

Connectivity Index


16/29


In2008,public refrigeratedwarehouse (PRW) capacitywas ledby Japan,with a totalof27.7million

cubicmeters, followedby India (18.6Mm3),Russia (16.0Mm3),andChina (15.0Mm3). LAC countries

werefar

behind.

At

the

time,

Brazil

had

the

most

PRW

capacity

at

4.5

million

cubic

meters,

while

island

countrieslikeTrinidadandTobagowereshowntohaveverylimitedcapacity,withameagre0.1million

cubicmeters.

Figure8.GlobalPublicRefrigeratedWarehouseCapacityin2008

Source:InternationalAssociationofRefrigeratedWarehouses(IARW),2008

Impact

on

Food

Prices

(And

thus

on

the

Poor)Ataregionallevel,theimpactoflogisticscostsonthefinalpriceoffoodproductsbecomesevenmore

relevant considering that, in 2006, more than 71 million tons of food products with a value of over

US$21billionwere imported intoSouthAmericaandMexico.A littleoverathirdof importsare intra

regionaltrade.Theremainder(wellover50milliontonsoffoodproductsperyear)isimportedintoLAC

fromoutsideoftheregion.Themajorityofthose foodproductsarrivesbyoceanshippingand isthus

subjecttoeverystepofthelogisticschain,including

Maritimetransport

Porttransfers

Customsclearanceandinspection

Warehousing

Modaltransfers

Domesticrail,trucking,and/orbargeshipping

Finaldistribution


17/29


Thesestepstypicallyadd30to100percentontothepriceofdeliveredgoods.And,inexceptionalcases,

suchasfruitimportstotheCaribbeanislands,logisticscantriplethecostofaproductfromthetimeit

leavesits

home

of

origin

to

the

time

it

arrives

at

market.

ThereisgreatheterogeneityinthewayinwhichLACcountriesareaffectedbylogisticscosts,depending

on therelativesharesofdifferent typesof food imports.Ananalysisofthebreakdownby food types

suggeststhat fornet importersof food,costsassociatedwithrefrigeratedcargocapacityandservices

arethecriticalbottlenecksbecausemeat,fish,anddairyrepresentthelargestshareofallfoodimports

byvalue(26percent).Ontheotherhand,forLACcountriesthatarenetexportersoffood,bulkstorage,

handling,andtransportaretheprimaryconcernsbecause,onaweightedaveragebasis,drybulkitems

constitutebyfarthebiggestshareoffoodimports,at31percentbyvalue.Thus,thedatasuggeststhat

the island countries of the Organization of Eastern Caribbean States, for example, should work on

reducing

the

cost

of

refrigerated

containerized

traffic.

Peru,

Brazil,

Bolivia,

and

Colombia,

on

the

other

hand,wouldbenefitfromimprovementsintheimportinganddistributionprocessfordrybulkgoods.

Regardlessof the shiftingpricesof staplecommodities inglobalmarkets,a largeportionof foodsby

volume are lowvalue goods and thus highly sensitive to international and domestic transport,

warehousing,andtransfercosts.Infact,inrecentyears,internationalanddomesticshippingcostshave

risen and fallen along with commodity prices, leaving the impact of logistics costs on food prices

relatively constant. Inotherwords, theburden (shareof freight rates asFOB cost for food) forboth

maritime and trucking elements of costs remained relatively constant as the delivered price of food

rose.Asoceanratesdoubledfrom2002to2007,themaritimeburdenfellbyonly1percent.Astrucking

ratesincreasedby50percentoverthesameperiod,thelandburdenroseby0.5percent.

Analysis of a number of supply chains in LAC countries illustrates that high logistics costs, including

transport, can punish not only lowvalue goods such as wheat, but also highvalue goods such as

pineapple(Schwartz,Guasch,andWilmsmeier,2009).TrackingpineappleimportsfromCostaRicatoSt.

LuciaviaMiamisuggeststhatdistance isnotacentraldriverofcostsandthatacountrysconnectivity

within the cost structure of its imports should be highlighted when tackling logistics, particularly

transport, costs. The analysis shows that the producer price of the pineapple represents only about

10percentof the finaldeliveredprice,while transportcosts related to landandocean transportand

handling account for43percent. In addition, storage, warehousing, consolidation, and the retail and

wholesaleprofitstogetherrepresentanother33percent,halfofwhich isalso logistics.Oceanshipping

representsaparticularly

large

part

of

the

transport

costs:

3.5

times

as

much

as

the

producer

price

for

thepineappleitself.Yet,thisisnotafunctionofdistanceconsideringtheoceanshippinglegfromMiami

toSt.LuciaisanorderofmagnitudemorecostlythanthelegfromCostaRicatoMiamieventhoughthe

triptoSt.Luciaisshorter.

TrackingakilogramofwheatfromthetimeitleavesthePortofVancouver,Canada,untilitarrivesatthe

mills of Ecuador confirms that distance and market size are less likely to drive transport costs than


18/29


infrastructure quality and competition among transport providers. The analysis shows that once the

wheatcargo isunloaded inEcuador,thecostofdomestictransporttoQuito isminimalduemainlyto

thehigh

degree

of

competition

in

the

Quito

market

and

the

availability

of

good

roads

linking

the

coast

and the capital city. However, when the price of wheat flour to other cities is assessed, domestic

transport costsaremore significant.Thedelivered cost toa city suchasAmbatoaddsanother20 to

25percentontothecostoftheproduct.Thelargepricedifferenceismostlyexplainedbythequalityof

theroadinfrastructureandtheabilityoftruckstomakeareturntripwithinadaywhentravelingtoand

fromQuito.Additionally, theanalysis suggests that themannerof transportmatters if it cancapture

economiesof scale.The distance from Canada toEcuador ismany thousandsofnautical kilometers,

whilethedistancefromtheportatMantatothemillinQuevedoisonly171kilometers.Yet,somehow,

shippingakilogramofwheatfromVancouvertoMantacostslessthanhalfofthecostoftruckingthat

same kilo of grain from Manta to Quevedo. If competing modes of transport are available,

agglomerationof

cargo

may

mean

economies

of

scale,

which

becomes

important

in

discussing

competitionindomesticshipping.

Figure9.LogisticsCostsAffectthePoor

Logisticsand transport costsare2to10timeshigher than

importtariffsforbasicgoods.

Thesebasicgoodsrepresent

20to30%of

household income

Forthe

poor

may

represent

upto70

Share

ofHHB

udgetspenton

food

GDP per capita (log)

Source:Dessus(2008).Datafromhouseholdsurveys.


19/29


Benefits

of

Decreases

in

Logistics

Costs

A reduction in logistics costs translates directly in lower costs of produced goods, which in turn

generatesasignificant

number

of

benefits.

Increased

Demand,

Production,

and

Employment

A 10percentage point decrease in logistics costs would increase demand for various industries and

employmentlevelstodifferingdegreesasafunctionofeachindustryselasticity.Forexample,demand

in the leather and shoes sector would increase by 12percent, followed by wood and furniture

(10percent), and the agroindustry (9percent). Employment would see the highest increases in the

wood and furniture sector (12percent), followed by leather and shoes (10percent), and textiles

(7percent).

Table2.

Impact

of

aDecrease

of

10

percentage

Points

in

Logistics

Costs

Sector DemandIncreases EmploymentIncreases

AgroIndustry 9% 5%

WoodandFurniture 10% 12%

Textiles 6% 7%

LeatherandShoes 12% 10%

Mining 7% 2%

Source:Guasch(2008)

Increased

Trade

Flows

AccordingtoWilson(2008),bringingbelowaveragemembercostshalfwayuptotheglobalaverage in

terms of border measures, such as port efficiency and customs environment, and insidetheborder

measures,suchasservicesector infrastructureand regulatoryenvironment,wouldresult inatotalof

US$377billioninadditionaltradeflowsofbothimportsandexports.Thiswouldrepresentanincreaseof

10percentfrom2004levels.

It appears that the variable with the strongest potential influence on increasing trade flows of both

importersandexporters is the insidethebordermeasureofdeveloping service sector infrastructure,

followedbythebordermeasureofincreasingportefficiency.


20/29


Figure10.BetterLogisticsMeansMoreIntraregionalTrade

0

10

20

30

40

50

60

70

80

90

100

ExpectedIncreaseinTrade

resultingfrom"BestCA

Adjacency Performance"


resultingfrom"EUlike

AdjacencyPerformance"


resultingfrom"EUlike

OverallTradePerformance"

Border Crossings & Customs Land Transport and Services

Central Americas Intra-Regional Trade Potential from Greater Integration

%G

rowthinTrade

Source:LCSSDEconomicsUnit,WorldBank(2010)

Table3.OverviewofSimulation:BringBelowAverageMembersHalfwayuptothe

GlobalAverage(changeintradeflowinUS$billions)

ChangeinTradeFacilitation

Importer Exporter Total

BorderMeasures

PortEfficiency

23.40

(0.6%)

84.53

(2.2%)

106.93

(2.8%)

CustomsEnvironment 32.87(0.8%) 32.87(0.8%)

InsidetheBorderMeasures

ServiceSectorInfrastructure 36.64(0.9%) 117.38(3.0%) 154.02(4.0%)

RegulatoryEnvironment 24.39(0.6%) 58.86(1.5%) 83.25(2.1%)

Total 117.30(3.0%) 259.77(6.7%) 377.06(9.7%)

Source:Wilson(2008)

AnIDBstudyshowsthata10percentreduction inregionaltransportcostswouldhavenearly20times

more impacton the regionsexport levels to theUnited States thana10percent reduction in tariffs

(Moreira,Volpe,

and

Blyde,

2008).

Increased

Earnings

for

the

Poor

Goodqualityinfrastructureinruralareasiscriticaltofacilitatingaccesstomarkets.Annualearningsper

capita in rural areas with road rehabilitation projects, and thus increased access to markets, were

35percenthigher than those in ruralareaswithout road rehabilitationprojects,18monthsafter the

improvedaccess.


21/29


Increased

Number

of

New

Products

and

Volume

in

Product

and

Export

Basket

Asthe

cost

of

production

falls,

products

that

previously

were

not

competitive

or

exportable

become

competitiveforeitherorboththedomesticandexternalmarkets.

Reduced

Food

Prices,

with

a

Positive

Impact

on

Poverty

and

Nutrition

As described, logistics costs affect food prices and thus disproportionately affect the poor. Any

improvement in logisticswillsignificantlybenefitthepoor,particularly if the interventions reducethe

spoilagerateofperishablefood,whichiscurrentlynear50percentofoutput.

Other

Benefits

Benefitsof improved logisticscanalsobeestimatedbasedondistance,time,andshippingcosts,three

otherimportant

factors.

Distance

has

traditionally

been

and

continues

to

be

asubject

of

study

as

it

relates to transport and other logistics costs. Time costs also matter when analyzing the impact of

logisticscosts.Infact,ithasbeencalculatedthateachdaysavedisworth0.8percentofanadvalorem

tariff(Hummels,2007)andthatadaylostisequivalentto1percentoftradeor70kilometers(Djankov,

Freund,andPham,2006).Finally,shippingcostsareimportantbecausebottlenecksconstraintradeand

reduce a countrys competitiveness. Studies show that eliminating market power in shipping, thus

increasingcompetitionamongshippingcompanies,wouldincreasetradeby5to15percent(Hummels,

Lugovsky,andSkiba,2009).SeeTable4forabroadillustrationoftheeconomicsoflogistics.


22/29


23/29

PolicWhileas

actions

a

excessive

themwo

such cos

neededt

Thethree

be divide

internalf

(e.g.,por

Recomhareofthe

nd

inactions

ly high in th

ldhaveam

s through p

buildaneff

Fi

areastra

d into sever

lows(e.g.,ro

s,airports,a

Logistics

mendatostsof logis

have

a

critic

region, ad

ajor impact,

roper action

ectivelogisti

gure11.Th

nsportinfras

l activities e

ads,truckin

ndbordercr

asaDriverf

onstoticsservices

al

role

in

th

ersely affect

even larger

s. The follo

ssystem.

Emerging

Sourc

tructureand

ach. Transp

industry,ra

ssings),exte

rCompetiti

educelies intheh

e

overall

log

ing growth,

thansecurin

ing figure il

ramework

e:Guasch(200

services,bu

rt infrastruc

ilways, inlan

rnalflows(e

enessinLA

ogisticndsofthep

istics

burden

trade, emplo

FTAs,and

lustrates th

andthePol

)

sinesslogisti

ture and ser

navigation,

.g.,shipping,

JoseLuis

Costsrivatesector

.

As

shown,

yment, and

overnment

framework

icyLevers

s,andtrade

vices, for ex

andcabota

airtransport

GuaschPa

,LACgovern

logistics

cos

poverty. Red

an indeedr

and policy l

facilitation

ample, consi

e),transfer

,andinterna

ge22

ment

s

are

ucing

duce

evers

can

sts of

odes

tional


24/29

trucking),

each the

turn,dep

publicse

Thedeve

side.On

theexisti

freight fl

conducte

Basedon

ontheco

fulfill

key

andinterfac

divided int

endson

the

torprocesse

lopment of

hesupplysi

ginstitution

w patterns

dtoidentify

analysisof

untrysneed

priorities.

Fig

Logistics

eandcoordi

o different c

interactionb

s.

ational logis

de,policyma

sandregula

must be id

potentialare

othsupplya

sandanage

ure

12.

A

Bl

asaDriverf

nation(e.g.,

omponents.

etweeninfr

tics strategi

kersshould

tions,andon

ntified, logi

asofimprov

nddemand,

daandmon

eprint

for

Sourc

rCompetiti

multimodali

The operati

structure,re

s should loo

lookat thec

goingprojec

tics perform

ementthrou

anational lo

itoringande

National

L

e:Guasch(200

enessinLA

mandinter

nalization o

gulations,pr

k at both th

omponents

tsintheare

ance evalua

ghanidentif

gisticsstrate

valuationsch

ogistics

Str

)

JoseLuis

odalcoordi

these typic

ivatesector

esupply sid

f thecurren

.Onthede

ted, and val

icationoflo

gyshouldb

emecanbe

tegy

Study

GuaschPa

nation),whi

al compone

developmen

and the de

t logisticssy

andside,c

ue chain an

isticsbottle

developed

ushedforw

ge23

hare

ts, in

,and

mand

stem,

rrent

lyses

ecks.

ased

rdto


25/29


Moving

Forward:

Toward

an

Effective

Logistics

Platform

Another way of thinking about an effective system is to break it into its two key components

hardwareand

software

and

their

respective

subcomponents,

as

listed

below.

Policymakers

ought

to

deviseastrategytobringtheseelementstoreasonablelevelsofeffectiveness.

Hardware

Export(andtourism)corridors

Networkofservicesites

Portandaccesses

Regionalexitpoints:portsandairports

Logisticsterminalsnetwork

Accesstotransportfacilities

Exportzones

Bordercrossing

Software

Singlewindows

Dedicatedlines:perishables

Privilegedlanes:basedontrackrecord

Customs

Warehousing

Coolchainstorageandtransportfacilities

Multimodalitylaw

Transport

services:

trucking

Certificationsonqualityandphytosanitarycompliance

DigitalizationofCertificatesofOrigin

Buildingon thestated frameworkandalongthe linesofthe identifieddeterminantsof logisticscosts,

thefollowingaresomeareasforpotentialactionbypolicymakers.

PortsandMaritimeTransport

Focusoninvestments,operationalefficiency,andlandsidelinkagesforgreaterconnectivity

Anticipategrowthandinvestinlandsideandwatersidecapacity

Introducespatialplanningintothenotionofportlocationandexpansion

Encourageconsolidation

or

coordination

of

small

private

operators

Usecompetitionauthoritytoinvestigateverticalandhorizontalintegrationissues

Airports

Focusonlinkageswithothertransportmodesandaccessissues

Developcoolingcapacity,sincemostperishablesusethatmodeoftransport

Implementsinglewindowproceduresanddedicatedinspections

Decentralizeservicesinlargercountries


26/29


CustomsClearanceandBorderCrossings

Improve clearances/inspections through better crossborder collaboration and coordination

betweenphytosanitary

and

customs

services

ImplementdigitalizationofCertificatesofOrigin

Setexportclearancetimesasthestandardforimportclearancetimes

Simplifycustomsdeclarationsforms,procedures,andclearance,andmoveintoasinglewindow

framework

Useriskbasedselectivityprocessforinspectionsanddeploydedicatedlinesforperishablesand

safeprofiles

Harmonizecustomsstandardsforsubregions

Reducefinesforminordocumentationerrors

Inland

Transport:

Roads

and

Trucks

Focusonspeedandeaseoftravel,competitioninserviceprovision,andaccessandcapacityof

transferandstoragefacilities

Improveroadquality,keeping inmindthatthepresentvalueofmaintainingaroadregularlyis

anorderofmagnitudelessthanrehabilitatingitonceeverytenyears

Strengthentruckingregulationsandenforcements

Facilitatethedevelopmentofamplestorage,warehousing,andtransferfacilities

Strengthenlogisticsplanningbasedonmoresophisticatedfreightflowmodeling

Corridorprogram

Selectivefeederroad

Access

and

linkages

ColdChain

Implementprogramofnetworkof siloswithcold capacity (asapublicprivatepartnershipor

withsunsetclauses)

Implementprogramofwarehousingwithcoldcapacityatexitpoints,suchasportsandairports

(asapublicprivatepartnershiporwithsunsetclauses)

Incentiveprogramfortrucks/containerswithcoolingcapacity

DecentralizationofExport/ImportsRelatedServices

Particularly formediumand largecountries,aselectiveandeducateddecentralizationofexportsand

importsservices

and

facilities

is

critical.

As

of

now,

in

many

countries

the

tendency

is

to

have

those

servicesconcentratedinasinglepointor location,whichaddstothe logisticscostsincegoodshaveto

bemovedthroughthatlocation,regardlessofwheretheyarebeingproduced.

SpecialEconomicZones

Sincetheprocess,expenses,andtimetoprovideorfacilitateaneffective logisticssystemcanbequite

lengthyandcostly,itisoftendesirabletocreatededicatedzoneswithstateoftheartlogisticstojump


27/29


start theprocessand capture relativelyquickly thebenefits.Thusdeveloping specialeconomic zones

neartheexitpointsissuggested.

PackagingProgram

Asmentioned,animportantsourceoflogisticscostsispooranddeficientpackagingofthegoodsleading

to high rates of damage and spoilage. To address this issue, governments could consider facilitating

CentersforKnowledgeTransferandServicesonpackagingtoassistproducersintheirpackagingneeds.

Thiscouldbedoneasapublicprivatepartnership.

MultimodalityProgram

Aneffective logistics systemneeds todevelopandusemultimodality andmultimodaloperators.The

transport system has to be integrated, not a system of uncoordinated transport modes. Integrated

transport planning (strategic corridor development) is thus critical, as is appropriate legislation to

facilitatethe

use

of

multimodality

and

multimodal

operators.


28/29


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LOGISTICS AS A DRIVER FOR COMPETITIVENESS IN LAC - 2011.pdf